Question

45. Which of the following is not associated with federal government debt? a. Liquidity risk b....

45. Which of the following is not associated with federal government debt?
a. Liquidity risk
b. Default risk
c. Maturity Risk
d. Both a & b

Homework Answers

Answer #1

Federal Government Debt does not have Default Risk as they are guaranteed by the US Federal Government and backed by the full faith and resources of the Federal Government. Further, in case the government is short of funds to honour the debt issue, it can always print more $ to fulfil the debt obligation(doing that would, however, lead to inflation). Federal Debt on account of its near-zero default risk possesses low yield and high credit rating, thereby leading to the presence of a highly liquid market in federal debt instruments. In other words, the high credit quality makes it easier to buy or sell federal government debt instruments, thereby making their liquidity risk zero.

Maturity Risk is present in federal debts as the government can decide to mature any debt before its stated maturity date.

Hence, the correct option is (d).

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